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A major German company has completed the tokenization of a bond on a blockchain, confirming the trend regarding the expansion of the phenomenon of tokenization of financial assets, despite the fact that the regulatory framework in this area (European and national) is constantly evolving.
Under the German Electronic Security Act that came into force in 2021, tokenizing an annual bond loan on a blockchain with a volume of 60 million euros was possible. Due to the nature of this technology, the tokenization of a bond on a blockchain has several advantages over traditional financial systems. In particular, the removal of the circulation of paper documents secured by notarization of information and the removal of intermediaries in charge of current clearing systems represent major advantages. In addition, the direct offer to investors results in overcoming the necessary intermediation function typically performed by banks.
In order to be able to tokenize bonds on a blockchain, the company complied with the provisions set forth in the German Electronic Security Act, which allows the tokenization of bonds through a so-called “crypto register.” Like European legislation, German legislation also makes it clear that it adheres to a general principle of technological neutrality, distinguishing between
- bearer bonds that are converted to electronic format through registration in a centralized registry; and
- the tokenization of the same through the use of distributed ledger technology (DLT) such as, for example, blockchain.
Therefore, neither technology is favored, not even with reference to the different species of DLT, remaining the main objective of using the electronic form for the issuance of such bonds.
With the entry into force of Regulation 2022/858 (the so-called DLT Regime Pilot), coordination with national regulations will be necessary since the DLT Regime Pilot only covers secondary market sales. In the case of Germany, for example, the Electronic Security Act regulates the part relating to the primary issuance of such bonds, which, at the time of its entry into force, as moreover clarified by the national regulatory authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin), would not have allowed the management of the tokenization of bonds on blockchain within the trading infrastructure.
With regard to Italy, it is necessary to dwell on coordination with the DLT Regime Pilot in at least two respects:
- by virtue of the disclosure requirements still in place, will it be necessary to strengthen the information obligation in favor of the investor with respect to the risks and the technological component of blockchain? Indeed, overly analytical and detailed disclosure, however comprehensive, could only be properly understood by a limited number of investors with specific technical expertise; and
- if one considers the tokenization of financial assets on blockchain at the issuance stage as
- a new form of documentation, circulation, and legitimization of equity securities as opposed to the paper or book-entry form currently provided for in Article 83-bis of the Italian Consolidated Law on Finance (TUF); as well as
- a form other than dematerialized with a central depository, as established by Regulation (EU) No. 909/2014 (CSDR), then the DLT Regime Pilot only regulates market infrastructures making it necessary for specific regulatory intervention that, like Germany for bond tokenization, recognizes digital financial instruments for both the issuance phase and their trading.
We will see whether the tokenization of bonds will spread out following this interesting case. On a similar topic, you can find interesting the article “EU Regulation 2022/858 could reduce the risk of a blockchain bridge-related cyberattack in the DeFi environment“.
Photo by Shubham Dhage on Unsplash